15833: Schedule A - State and Local Income Tax Deduction Limitation (Wks SALT)

Why and how are the state and local income tax deductions being limited in Drake18?

Prior to the Tax Cuts and Jobs Act (TCJA), taxpayers were allowed an itemized deduction on the Schedule A for state and local sales tax, as well as foreign taxes,* with an election to deduct state and local general sales tax instead of using local income tax.

*Note: Foreign real property tax could not be deducted other than taxes paid or accrued carrying on a trade or business.

Under new guidelines from the TCJA, however, the deduction for state and local income and property taxes is limited to one total combined deduction of $10,000 ($5,000 if Married Filing Separately). This applies to tax years beginning after December 31, 2017 and before January 1, 2026.

Any amounts paid in 2017 for a state and local income tax imposed for a tax year beginning January 1, 2018 are treated as paid on the last day of the tax year of imposition, therefore, cannot be deducted on the taxpayer’s 2017 federal tax return, with the following exception for real property tax-- a prepayment of anticipated 2018 real property tax may be deductible for tax year 2017 if:

The payment was made in 2017

The real property tax was assessed before 2018.

In Drake18, if the cumulative amount entered for real estate taxes, personal property taxes, state and local income taxes, and sales tax exceeds the $10,000 limit ($5,000 if MFS), a new worksheet Wks SALT will be generated to show the total paid vs. the allowed amount for each tax paid. Only the lesser of the total taxes paid or $10,000 ($5,000 if MFS) will flow to Schedule A, line 5e. The worksheet shows how much of each tax is being carried to the Schedule A, line 5e for your records. Since some states may have different allowable amounts, this worksheet is also used to maintain the breakdown of amounts for that purpose.

Note, in some circumstances, the sales tax will be deducted instead of the income taxes because this will usually result in a more beneficial deduction when considering the tax-ability of the refund for next year. As the Wks SALT states in this circumstance:

If state income taxes are deducted on Schedule A, and then a state issues a refund of some or all of those taxes, the refund may have to be reported as income in the following year. The program has chosen to deduct sales tax instead of income tax, even though the income tax is higher, so that no state refunds will be taxable on next year's return. Mark the Force income tax checkbox on screen A, line 5 to force the income taxes to be deducted instead of the sales taxes, if that results in a benefit to the taxpayer on a state return.